Persistent Systems :NEW SERVICE LINES WILL DRIVE GROWTH: IFCI research

Focus on key service lines to drive next wave of growth
Persistent Systems has bet big on new service lines like cloud, enterprise mobility, enterprise collaboration and business analytics to drive growth. Contribution from these service lines is expected to grow from 45% in FY12 to 60% in FY14. All these service lines have witnessed double-digit growth on a sequential basis over the last four quarters.

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Robust growth in top clients – higher client mining
Persistent has increased its focus on top clients as a result of which revenue from top and top 10 clients has grown 27%YoY and 19%YoY in FY12. Some of the large clients like Intel, Clearmill, Yahoo, Cisco and IBM provide huge scope for client mining. It has a huge client base of 351 customers and has a strong base of 314 million dollar clients, which offer scope for increased volume growth.
Inorganic initiatives boost volumes
Various small and large ticket acquisitions provides visibility for growth and also offer cross selling opportunities. The company has done various acquisitions like Infospectrum, Openwave and IBM Triveli which have revenue run rate in the range of USD 6-10mn. Inorganic growth has driven growth in business verticals as revenue from telecom and life sciences vertical surged 27%YoY and 25%YoY respectively in FY12.
IP business provides immense scope
Non linear services are an important driver for volume growth and also support operating margin. Persistent, which derives 9% of its revenues from non-linear services, plans to increase this exposure to 16% in FY14. Persistent provides a wide range of IP services and this segment is also expected to grow in FY13.
Valuation
We initiate coverage on the stock with a BUY recommendation and a target price of Rs 466 based on 10x FY14E earnings.


Valuation
Post its listing in April 2010, Persistent commanded a huge premium to mid-tier IT companies due to its differentiated service offerings and higher operating margins. In the last 2 years Persistent has been able to achieve revenue growth of ~28% backed by strong volumes. Operating margin for Persistent which dipped at the start of FY12 has also come back to 23% level, which is higher than any other mid tier IT company. We are confident of the Persistent business model and believe it will achieve strong growth in FY13 and FY14, maintaining similar levels of EBIDTA margin. We expect Persistent to report an EPS CAGR of 10% (FY11-14E). Persistent has traded at an average PER of 9.9x (FY11-13).
We assign a target PER of 10x to Persistent for FY14. We initiate coverage with a BUY recommendation and a target price of Rs 466 based on our FY14E earnings.